Getting Approved Is Easy. Getting Out Is the Hard Part.

A private mortgage exit strategy is your plan for replacing the private loan with a regular mortgage before it comes due. Private mortgages are usually short, often a year or two, and most are meant to be a bridge. If you can't show how you'll qualify with a bank or other lender when the term ends, an approval today can turn into a problem later.

Getting approved is the easy part. Getting out is the part that decides whether the mortgage was a good idea.

What Is a Private Mortgage Exit Strategy?

It's the answer to one question: when this private mortgage ends, what replaces it? Usually the answer is a mortgage from a bank, credit union or other regulated lender, which means you have to qualify for that mortgage at that time. A solid exit strategy names the lender type, the income you'll use to qualify, and the timeline.

Why Isn't an Approval the Same as a Good Idea?

Because a private lender approves based on the property and the equity in it, and the mortgage you need next gets approved based on you. Private lenders can say yes quickly, and that speed helps when you're under pressure. But the speed doesn't tell you anything about the day the term ends.

If the next lender can't approve you then, your choices narrow fast. You may renew the private mortgage on whatever terms the lender offers, sell the property, or look for another private lender. None of those is a disaster on its own, but none of them was the plan.

What Do Lenders Look At When You Try to Get Out?

Generally, four things: your income, your credit, the property and how much equity is in it. Of those, income is where exit plans most often break. A regular lender wants to see that you can carry the payments from documented, verifiable income, and for many borrowers that means a track record. If your income is new, irregular or hard to document, a lender may not count it the way you would.

The Financial Consumer Agency of Canada has a useful overview of how mortgages work in Canada if you want the basics of what lenders ask for.

What Does This Look Like on a Real File?

I recently worked with a couple who needed financing for a property purchase. I put the file together and got them approved with a private lender. On paper it was a yes.

Then I did what I do on any private file: I took a closer look at how they'd get out. When I worked through the numbers, they couldn't show enough income to qualify for a regular lender at the end of the term. The property itself also narrowed the list of lenders who would take it on.

So I recommended they not take the deal. I could have closed it. But a mortgage that works on day one and has no way out is a risk I wasn't comfortable asking them to carry.

What Should I Ask Before Accepting a Private Mortgage?

Ask these before you sign, and ask them of your broker as well as the lender:

• How long is the term, and what are the renewal terms if I can't leave on time?
• What type of lender will replace this, and what will they need from me?
• Based on my documented income today, would I qualify for that lender now? If not, what has to change, and is it realistic in the time I have?
• What does it cost to exit early or late? Ask about fees, penalties and lender charges.
• What is plan B? Selling, a second private lender, or a co-borrower are the usual ones. Know which one you'd use.

If the person arranging your mortgage can't answer these clearly, that's information too.

When Is a Private Mortgage Still a Good Idea?

When the exit is clear. A private mortgage can be the right tool when the reason you need it is temporary, such as a credit issue you're repairing, income that will be documented by the time the term ends, or a property that needs work before a regular lender will take it. In those cases the exit is part of the plan from day one, and the higher cost buys you time to get there.

The ones that go wrong are the ones where the exit was assumed rather than checked.

Frequently Asked Questions

What is a private mortgage exit strategy?

It's your plan for replacing a private mortgage with a regular one, or otherwise paying it out, before the term ends. It names how you'll qualify, with which type of lender, and by when.

How long does a private mortgage usually last?

Private mortgage terms are commonly short, often a year or two, though they vary by lender and file. Most are designed as a bridge to a conventional mortgage.

Can I get out of a private mortgage early?

Often yes, but the terms differ by lender. Some charge fees or a minimum amount of interest. Ask for the exit terms in writing before you sign.

What happens if I can't qualify for a regular mortgage when my private mortgage ends?

Your options usually include renewing with the private lender on their terms, finding another private lender, or selling the property. That's why it's worth checking how you'd qualify before you take the mortgage, not at the end of the term.